What impact will the Fed’s recent interest rate increase have on investment and development?
Bank regulations and overdevelopment a bigger factor
By Aron Will
Executive Vice President
CBRE Capital Markets
That raise has very little to no impact to development financing in our sector.
Spreads and all-in rates for floating-rate construction loans are still so incredibly low (high 2s to low 3s, all in) that they would have to increase by 100 to 150 basis points to become impactful.
The magnitude of development activity and bank regulations regarding high-volatility commercial real estate loans are what is impacting the construction lending market at the moment.
Watch the home market for indicators
By Allan Brown Jr.
Co-Founder and Principal
Prevarian Senior Living
With rates near historic lows, we don’t believe that the December Fed rate increase will make a significant impact on development or transactions.
Necessary in hindsight? Probably not, but equity appetite remains high and debt is reasonable and available.
One consideration, however: We often rely upon our residents’ ability to realize equity from the sale of their home. The housing market is a great indicator for seniors housing, and when future rate hikes begin to impact residential sales and lending, then the dense inner-workings of the Federal Reserve may deliver a swift, years-long impact on our industry.
Indirect impact on world economy changed price points
By Talya Nevo-Hacohen
Chief Investment Officer
Sabra Health Care REIT
The Fed’s recent rate hike is not impacting transaction pricing and velocity directly.
The broader uncertainty in the economy — driven by energy prices, China, and turmoil in the Middle East amid a domestic presidential campaign — is creating volatility in the equity markets, changing the cost of capital for lenders and buyers, which in turn impacts their appetite for deals and risk.
There is often a pause in the market when asset pricing shifts, as both buyers and sellers have to adjust to a new reality. Sellers who need to divest will find buyers but at a new price point.
There’s a silver lining to rate increases
By Frank Marro
CEO
Drever Capital Management
The answer depends on whether you’re a glass-half-full or glass-half-empty person.
Half-full thinking suggests the rising interest rates are a result of inflation fears and real estate is a great inflation hedge.
On the other hand, rising interest rates hurt development due to higher borrowing costs and also hurt sales prices due to the likely correlation with higher cap rates.
Similarly, higher interest rates also result in less aggressive buying by REITs. But less supply is a good thing for deals already in development.
I’ll go with half-full.
Rates will moderate asset pricing in the long term
By Clint Malin
Chief Investment Officer,
LTC REIT
If the Fed phases in moderated and telegraphed rate increases, I do not believe there will be a substantial near-term impact on pricing and deal flow.
Longer term, however, a higher interest rate environment would probably moderate asset pricing.
Based on fourth-quarter 2015 earnings news from around the industry, items such as concern of overdevelopment in certain markets, financial performance of a couple larger skilled nursing providers, and higher cost of capital for healthcare REITs are likely to have a more immediate and meaningful impact on cap rates and possibly deal volume if pricing does not adjust.
Expect a gradual slowdown in 2016
By Jacob Gehl
Managing Director
Blueprint Healthcare Real Estate Advisors
The economy may not be as strong as the Fed had hoped.
Focusing specifically on seniors housing, higher interest rates translate into a higher cost of capital. A higher cost of capital should have some degree of a negative effect on the pricing of senior housing debt and equity.
The full impact of the rate increase will not fully be realized for several months. We expect a gradual slowdown in 2016 in M&A activity and a small increase in cap rates, most likely occurring in the second half of the year.
We do not anticipate a nominal interest rate hikes or a macro-
economic event to materially impact the pricing or velocity of seniors housing.
Appetite is still strong in seniors housing
By Dave Hegarty
president and COO
Senior Housing Properties Trust
The Fed’s move, in addition to other influences, has already had an impact on capital availability.
The public debt and equity markets are very volatile and new, reasonably priced capital
is not readily available for buyers who utilize those sources of capital.
Secured debt and private equity are still generally available, which will keep pricing and velocity strong in the near term.
Given the Fed’s position to increase rates slowly, there still will be an appetite to find alternative sound investments with attractive returns, and seniors housing is one such alternative.
Real impact will be if increases continue
By Alan Plush
CEO
HealthTrust
The larger question remains: What is next?
Is the Fed able to continue to raise rates as it would desire, or was this a largely symbolic move?
The fate of the global economy will now, more than ever, factor into its decisions about future rate hikes and the signals remain mixed.
A quarter-percent hike won’t save the industry from overbuilding. However, a sustained series of increases totaling 200 basis points or more likely would.
Since most new projects use floating-rate debt, these rate hikes would more immediately impact borrowing costs — and thus feasibility — for new projects or projects in lease-up that have not swapped floating-rate for long-term debt.